Whether you’re a first-time buyer or a seasoned investor, there are new rules in 2018 that you will want to understand if you plan to buy a condo in Toronto. In this blog post we are going to explain the new rules and give you some tips to navigate them.
The 2018 condo market at a glance:
What are the new rules and changes?
We spoke with James Harrison, President of Mortgages.ca, to give us a full understanding of what to expect this year.
The new rules are simple:
As of January 1st, 2018, the Bank of Canada’s “Universal Stress Test” is in effect.
The buyer must now qualify for their mortgage based on the 5yr posted rate (4.99% today) or their contracted rate plus 2.00%, whichever is greater.
What does it mean for buyers in 2018?
“In my opinion, this will negatively impact one’s buying power by approximately 15-20% on average,” says James Harrison.
This stress test is an expected addition to the federal government’s measures to limit over-leveraged buyers from entering the housing market. In February of 2016, the federal government raised the minimum down payment from 5% to 10% for properties between $500,000 to $1 million. As we discussed in a previous blog post about those down payment rules and changes, the aim was to “reduce taxpayer exposure and support long-term stability.”
In October of 2016, a first round of stress tests was introduced to target insured mortgages (borrowers with less than 20% down payment). These borrowers were required to qualify at the Bank of Canada’s posted rate, which was 4.64% at the time, in hopes of creating a buffer against over-leveraged home purchases.
The newest round of stress tests is also about creating a buffer zone, but it applies to uninsured mortgages (borrowers with 20% down payment). Effectively, everyone applying for a loan through a regulated lender will now be stress tested. In a previous post, we explained in plain words how your buying power may change under the new mortgage rules.
“This will have a huge impact on some buyers but not all,” says James Harrison. “I believe this will negatively affect first time buyers as they tend to have lower incomes and also carry some debt from school. With one’s buying power negatively affected by 15 to 20% you would think this will mean prices will come down. I would be surprised if prices came down more than 5% in 2018.”
“For the well qualified buyers (those with higher incomes and little to no debt) 2018 will most likely see less competition, which could mean more of a buyer’s market. We have not seen this in a very long time in the GTA.”
“If you purchased a property prior to January 1st, 2018, you can still qualify for a new mortgage based on the old mortgage rules (with some lenders). Some top Brokers may also have lenders that can still qualify clients under the old rules (or at least using the discounted 5 fixed rate of 3.29% for example) and a 25yr amortization. This can increase one’s buying power by about 10- 15%.”
“If a buyer bought a property (same for pre-construction) prior to October 2016 (they could also qualify for an insured mortgage based on the rules prior to the first stress test for insured buyers). This is a huge benefit for some buyers of pre-construction units.”
What to do if you’re not approved for a mortgage under the new rules?
“If a buyer no longer qualifies to purchase a property they want they may have to look for a strong co-borrower to sign on to the mortgage to help increase the income and bring the debt services ratios in line. Unfortunately, this may mean a lot more potential buyers will now be looking for a rental property, which in itself is already very challenging in Toronto.”
Alternatively, there are mortgage lenders that operate outside The Office of the Superintendent of Financial Institutions (OSFI). The ‘stress-tests’ apply only to lenders that are regulated under OSFI, such as the Big Five banks, while some second-tier banks and credit unions fall outside the new rules. These lenders have often been painted as “shadow lenders,” but they do fill a gap in the home buying process.
For buyers who don’t approve under the new mortgage stress tests, these non-regulated lenders can be a viable option and many of them offer rates competitive with top tier banks. One thing to keep in mind, however, is that non-regulated lenders are still hoping to limit risk, which means they tend to prefer borrowers with strong credit history. If your credit is weak, you may face higher rates on your mortgage. As always, it’s best to do some research.
“It is more important than ever for each and every buyer (or anyone looking for a mortgage) to connect with a very experienced Mortgage Broker. Going to your local bank branch is simply not a smart option anymore and has not been for years, but the new stress test will show this even more. A good Mortgage Broker will be able to help explain this fully and find you more options. Even if you are a well-qualified buyer you may not qualify with your bank but you may still qualify for excellent schedule A products with another lender. Do not give up until you speak with a good broker.”
Why is the government implementing these new mortgage rules?
“The reality of these most recent mortgage rules is that the federal government has serious concerns with the level of personal debt loads in Canada. So, they are continuously coming out with ways to help make sure everyone can truly afford the mortgage they are taking on. I personally feel this was too much, and I would not be surprised if the government is forced to pull this back within the next two to three years.”
“I am optimistic that 2018 will still be a strong year in real estate, but realistically a lot of buyers may be out of the market completely. I expect that 2018 will most likely be the year of mom and dad providing the down payment and co-signing for the mortgage as well.”
“I strongly encourage each and every buyer to contact a well-qualified and experienced mortgage broker for all of their mortgage needs, whether it is a purchase, refinance, or renewal.”